BACKGROUND ON HERBALIFE-RELATED BUSINESSES

Steven and Debbie Combs (the “Combses”) were heavily involved with Newest Way to Wealth (“NWTW”), a lead generation business founded by Chairman’s Club member Doran Andry and other senior Herbalife distributors in the 1990s.[1]

In 2002, NWTW, Herbalife, the Combses and other senior Herbalife distributors were sued in class action in federal district court in Los Angeles. Plaintiff alleged, among other things, that Herbalife and NWTW constituted a pyramid scheme and that the defendants were committing common law fraud and securities fraud by making deceptive earnings projections and misrepresenting the risks inherent in pursuing the Herbalife business opportunity. Amended Complaint, Jacobs v. Herbalife International, Inc., 02-CV-1231 PA (C.D. Cal. 2001), Combs Exhibit A. Plaintiff further alleged that the Combses were close associates with Anthony Powell and were actively involved in developing the NWTW lead generation system. Id. at 6-7. Herbalife settled the case for $6 million in 2004.

A year after the NWTW lawsuit was filed, the Combses incorporated Premier Team International Inc. (“PTI”), which registered a website that offered many of the same tools previously provided by NWTW, including direct marketing tools, lead generation, and instructional videos. (www.premierteaminternational.net). See Combs Exhibit D. The PTI website featured the Combses as well as Ryan Swanson (pictured below), another senior Herbalife distributor who appeared in several of the Combses’ recruiting videos. The PTI website is no longer active, but can be viewed at http://web.archive.org/web/20140102100548/http://premierteaminternational.net/.[2] Notwithstanding litigation that accused PTI’s founders of running a pyramid scheme, Herbalife certified PTI as an approved seller of business methods to distributors. See Combs Exhibit E.

Primary Source Data on Business Practices

The Combses produced a series of videos hosted on the PTI website that promoted the Herbalife business opportunity through deceptive income testimonials and encouraged PTI members to focus their efforts on recruiting new distributors into the scheme.

One video produced by the Combses, entitled “Fastest Plan to Build Financial Freedom,” detailed the Combses’ experience with Herbalife. Debbie Combs told viewers of the video that “[w]hen we started Herbalife, we were in serious trouble . . . We were about to file bankruptcy. In fact, we had made an appointment to file bankruptcy with an attorney. Thank God he called in sick the day we signed up for Herbalife.” Available at https://vimeo.com/user24651359/review/105691012/3087935ae0, (34:56). Debbie said she and her husband became successful because they followed the advice they received from their upline mentor, who told the Combses that they needed to “get on the products,” get to supervisor, and attend a leadership development weekend. (37:49). But the Combses “were $140,000 in debt” and “didn’t have the money to go supervisor.” Notwithstanding the debt they had already accumulated on their “deck of credit cards,” somehow they “figured it out.” Their upline mentor pressured them to attend the leadership development weekend, telling them that skipping it would be a “broke minded decision” and that if they “wanted to stay broke, then that’s the kind of decision” they should make. At the leadership development weekend, the Combses learned “how to duplicate success . . . to grow royalty income. The income that you work for that keeps on growing,” where “the checks come in month after month even when you’re not working.”

The Combses encouraged other Herbalife distributors to follow the same advice, placing particular emphasis on purchasing the volume of Herbalife products necessary to qualify as a Supervisor immediately, attending leadership development weekends, and recruiting new distributors into the scheme. “You want to make $5,000 a month,” one distributor rhetorically asked on the video, “[y]ou need to do A, B, and C. A, get to training. B, get to supervisor. C, get to LDW [leadership development weekend].” (52:24). The distributor continued, “[t]he biggest thing, obviously . . . is that duplication is the key thing to success.” (52:17).

One video, hosted by the Combses’ business associate Ryan Swanson, introduced viewers to Stacie, who was living “paycheck to paycheck” and “never getting ahead.” Stacie went searching for a “smarter way” and found Herbalife. At the time Stacie found Herbalife, she was $90,000 in debt and facing bankruptcy and thus did not have the $299 needed to start the business. But recognizing the “opportunity,” she used her grocery money to get started. Once she began with Herbalife, her life “completely changed for the better.” She got “off of her medication” for diabetes “which is completely gone now” as a result of using Herbalife products. And she told viewers of the video that she made $900 in her first month working part-time, $2900 in her second and $15,000 in the month immediately preceding the video. Available at https://vimeo.com/user24651359/review/105691660/ec2d15e3ea (15:05-18:53).

Another video began with an introduction to Ryan Swanson, who claimed that he was able to take his Herbalife business from “zero to over $20,000 a month . . . in just 18 short months.” Available at https://vimeo.com/user24651359/review/105696491/62dcbeda5e (0:05-30). Following the introduction, Ryan stressed the importance of “building the asset” of a network below you, promoting the concept that Herbalife distributors can make money even when they are not working. Ryan also told recruits they should purchase enough Herbalife products to qualify for supervisor immediately: “Write down the word supervisor. One of the keys to our success is that we made supervisor right away.” (9:35-9:50.) Ryan then introduced several purported success stories, including Jim, who “borrowed money from family” to become a supervisor on his “1st day in business” and earned over $6500 after his fourth month. (45:15.)

The videos materially understated the cost of pursuing the Herbalife business opportunity and compared those costs to a hypothetical “traditional business.” One video told PTI members that (i) the start-up cost of an Herbalife distributorship was only $299, as compared with $250,000 for a traditional business, and (ii) with Herbalife, “All you need is a computer and phone.” The $299 materially misstated what distributors would have to spend under the PTI system, as PTI recommended to distributors that they spend up to $1,900 per month on leads, among other expenses. See infra Fast Plan slide. The same video told PTI members that 64% of traditional businesses failed in their first year, but included no disclosure about the high failure rates of Herbalife distributors. Available at https://vimeo.com/user24651359/review/105691660/ec2d15e3ea, (12:33).

Another PTI video stressed the importance of “duplication,” a common euphemism among senior Herbalife distributors for recruiting new distributors into the scheme and pushing them to order large volumes of Herbalife products. The video claimed that by following the PTI system for duplication, members could earn more than $10,000 per month, the vast majority of which would come from royalties and bonuses. Available at https://vimeo.com/user24651359/review/105697083/a61f2b4b90, (14:21).

Another PTI video stressed the importance of “residual income” and getting “paid for other people’s time.” (emphasis in original) The video claimed that the PTI system could “Eliminate the risk” of owning a small business. (emphasis in original) Available at https://vimeo.com/user24651359/review/105696490/ad492a8e22, (11:27, 12:10).

Another PTI video told distributors that if they adopted the “Fast Plan,” they would be earning $10,000 per month within four to five years. The “Fast Plan” required PTI members to spend $1,900 a month on leads. See infra for a discussion of the Combses’ lead generation practices.

The PTI videos contained numerous depictions of the Combses enjoying a lavish lifestyle, including images of boats, mansions, luxury cars, and expensive vacations, all of which was designed to suggest that such extravagances were within reach for Herbalife distributors using the PTI system. Available at https://vimeo.com/user24651359/review/105696491/62dcbeda5e, (6:40).

The Combses also produced an audio testimonial containing deceptive claims about the medicinal effects of Herbalife products, including a claim by an Herbalife distributor that Herbalife products had cured her arthritis in three days. Combs Exhibit H, see also https://vimeo.com/user24651359/review/105691660/ec2d15e3ea (15:05-18:53) (claim that Herbalife cured diabetes).

Online Recruiting Tools

The templates often advertised the ability to “work at home,” be your own boss, and “earn extra income.” They also touted the notion that PTI was “featured on” major news networks.

The PTI website sold “merchant accounts” to members for the “special price” of $49.99, plus four additional “processing fees,” the details of which were not made clear. PTI told members that obtaining a merchant account would “Increase Your Sales Instantly!” and that “research has proven that accepting credit cards can . . . increase your sales by as much as 400%” The website then asked distributors, “[c]ould your business use an extra 400% in sales? You Bet it Could!”

The PTI website also told prospective recruits that “Financial Freedom Awaits You!”, and asked prospective recruits if they would like to be “debt free and enjoy financial freedom,” “Send your children to the best schools,” and “Live the lifestyle you always dreamed about.” Combs Exhibit I. The website invited prospective recruits to “Discover how Wendy & Dan profited $2,600 in their first 45 days and now make a six figure income around their kids.” Id.

PTI has been affiliated with at least 88 other Internet domains peddling “work from home” opportunities, including www.premierincome.com, which asked visitors “what would you say to $500 to $6,000 more per month within the next 30-90 days – working from home part-time?” See Combs Exhibit J and Combs Exhibit K. That Premier Income website recounted “life changing success stories,” like one Herbalife distributor who quit her job after only 3 months in the PTI program, another who was “able to match an income that had taken [him] over 20 years in banking to attain,” and a third who made over $300,000 a year. Combs Combs Exhibit L.

The website www.premierincome.com was also peppered with quotes from the likes of Nelson Mandela and Robert Kennedy. “As Nelson Mandella [sic], President of South Africa, stated in his 1994 inaugural address: Our deepest fear is not that we are inadequate. Our deepest fear is that we are powerful beyond measure . . . . As we are liberated from our own fear, our presence automatically liberates others!” The website then quickly told visitors that “[y]ou have what it takes! . . . Simply enter your name and email address to view our Free Premier Presentation. Choose Success!” Combs Combs Exhibit M.

The registration form for the “information package” on the Premier Income website also included rags-to-riches stories and deceptive income claims, including one from Marilyn Combs, Steven’s mother, and Ryan Swanson, the Combses’ collaborator on the PTI system. Combs Exhibit N.

Several Internet domains previously associated with the Combses, such as http://pticentral.com/, now redirect to a site owned by an affiliate of Responsive Data LLC, which still sells leads, which Herbalife claims are no longer being sold by senior Herbalife distributors.[4] Furthermore, at least one of the Responsive Data websites is “presented by” Steve and Debbie Combs.

The Combs and Treats also use Facebook to promote Herbalife and tout their luxurious lifestyles. One Facebook post depicts a jaunt to the country, where Steve Combs and Cari Treat drank wine and shot pistols and rifles at canisters of Herbalife products.

Nutrition Clubs

As noted above, the Combses’ daughter Cari Treat, along with her husband Brian Treat, run California Fit Clubs, Inc., a business promoting nutrition club “franchises” in California and Arizona.

Brix Health and Wellness Club uses misleading medicinal claims to unload Herbalife products. For example, a post on the Club’s Facebook page suggests that Herbalife products can help prevent heart disease, cancer and diabetes.

Brix Health and Wellness Club touts it connection with President’s Team member Zachary Tartol, whose father John Tartol serves on the Herbalife Board of Directors and is a Chairman’s Club member.[6]

Lead Generation

Through PTI and its website www.RealTimePTILeads.com, the Combses sold leads to distributors until Herbalife suspended the practice in 2013. See Combs Exhibit Q. The site now bears the copyright of Responsive Data LLC, a lead generation company that operates many of the Combses’ former recruiting websites. Combs Exhibit R, available at http://www.responsivedata.com/. Although the precise nature of the relationship between the Combses and Responsive Data LLC is unclear, it appears that Responsive Data LLC took over certain of PTI’s websites and simply replaced references to PTI with Responsive Data LLC. Compare Combs Exhibit S and Combs Exhibit T. Indeed, as noted above, at least one Responsive Data recruiting website says it is “presented by” the Combses. It appears that Real Time PTI Leads, is still offering tools for “building your business” and “other Home Business Advertising Solutions.”

Links to Other Senior Distributors

As noted above, the Combses were sued along with Chairman’s Club member Doran Andry and other senior Herbalife distributors for, among other things, RICO violations stemming for their operation of a pyramid scheme. Jacobs v. Herbalife International, Inc., 02-CV-1231 PA (C.D.C.A. 2001), attached as Combs Exhibit A. The plaintiffs alleged that the Combses were close associates with Anthony Powell and were actively involved in development of the Newest Way to Wealth (NWTW) lead generation system. Id. at 6-7. The plaintiffs further alleged that Herbalife conducted an investigation into NWTW and convened a meeting with Powell and the Combses to discuss NWTW’s business practices. Id. at 31-32. According to the complaint, the meeting led to no material change in NWTW’s business practices. Id. Herbalife settled the case for $6 million in 2004.

The Combses with President’s Team members Craig and Caroline Tsutakawa.

The Combses with the Tsutakawas, Chairman’s Club member Dan Waldron, President’s Team members Cody Morrow, Dennis and Kerry Dowdell, Christopher and Mayumi Reese, Jennifer Gunter, Jay and Lisa Curtis, Katie Carr, John Franchetti, and other senior Herbalife distributors.

The Combses were honored by Herbalife in a 2009 edition of Herbalife Today, a magazine published by Herbalife, for achieving 2 million lifetime volume points. The article repeated the Combses’ rags-to-riches story. “Facing foreclosure and swamped with debt, the couple prayed for a miracle.” Of course, that miracle was Herbalife, which “couldn’t have come at a better time for them.” Because of Herbalife, “the quality of life they now enjoy with their children is simply priceless.” Combs Exhibit U.

Consistent with the nepotism that pervades the ranks of senior Herbalife distributors, the Combses’ son Ryan and his wife Jennifer were honored in a 2001 issue of Herbalife Today for reaching the level of President’s Team. Following the familiar pattern of Herbalife testimonials, the article explained that before deciding to pursue the Herbalife business opportunity, Ryan “was working in a grocery store earning $300 a week,” and Jennifer was a single parent “working 12 hour days as a hairstylist trying to earn enough money to support her young son.” But, “[a]s fortune would have it,” Ryan and Jennifer met on a Herbalife cruise in St. Thomas “fittingly called the ‘Carnival Destiny’.” As a result of Herbalife, “they have bought a brand-new competition ski boat,” and “their monthly income is more than $12,000.” The article concludes with Ryan and Jennifer gushing over the fact that they “are living the kind of lifestyle we only dreamed about before.” Combs Exhibit V.

The elder Combses were again honored in the winter/spring 2014 issue of Herbalife Today for reaching Chief Executive President’s Team. According to the article, becoming an Herbalife distributor “was the best decision of [their] lives.” Combs Exhibit W.

When the Swansons qualified for President’s Team in December of 2001, Herbalife Today chronicled their ascent from being “exhausted and very dissatisfied” with their lives to “averaging $22,000 per month.” Summing up their experience with Herbalife, Ryan told the magazine that “Herbalife has turned our dreams into reality.” Combs Exhibit X.

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